The President's Tax Bludgeon

Instead of an olive branch, the President keeps campaigning.

Updated Nov. 12, 2012 12:01 a.m. ET

If that was an olive branch, we'd hate to see the bludgeon. We're referring to President Obama's appearance on Friday in the White House East Room, his first public remarks since his re-election Tuesday. If the President wanted to send a gesture of magnanimity in victory, this wasn't it.

Though the campaign is over, the event was staged like a campaign event, complete with a multi-ethnic backdrop for the cameras, a cheering crowd and no media questions. The President said he is "open to compromise" and isn't "wedded to every detail" of his budget proposals. He invited Congressional leaders of both parties to the White House to talk next week.

But that was about the extent of his bipartisan outreach. Most of the speech repeated what he was saying in Ohio two weeks ago. And on the vexed question of taxes, the central dispute in the debate over the looming 2013 fiscal cliff,
Mr. Obama
said he will insist that taxes go up on anyone who makes more than $250,000 a year.

ENLARGE

President Obama in the East Room of the White House on Friday
Getty Images

We took it as a hopeful sign at first that Mr. Obama didn't mention "tax rates." That could leave some room to compromise with House Speaker
John Boehner
,
who said this week he'll consider more tax revenue without raising tax rates. But later on Friday, White House spokesman Jay Carney said the President will veto any bill that includes an extension of the current tax rates for those earning more than $250,000.

Mr. Obama also demanded that House Republicans immediately pass a Senate bill extending current tax rates for lower incomes but not for everyone else, including the millions of small businesses that pay taxes at the individual rates. He added: "And I just want to point out this was a central question during the election. It was debated over and over again. And on Tuesday night, we found out that the majority of Americans agree with my approach."

Well, that's not as clear as he claims. One exit poll question on Tuesday asked "Should taxes be raised to help cut the budget deficit?" The answer was no by nearly 2 to 1. A second question asked if tax rates should "increase for all" (13%); "increase only on income over $250,000" (47%); or "not increase for anyone" (35%). Three quarters of the latter 35% voted for Mitt Romney, which means they are represented more or less by Mr. Boehner, whose House majority also won re-election. On taxes as with so much else, the country is still divided.

Mr. Obama's hard line will cheer his left flank, which wants him to drive Republicans into submission on taxes and everything else. Apart from the joy of humiliating the GOP, the calculation seems to be that tax rates don't matter to the economy. So raise rates with impunity, pocket the extra revenue, and only then discuss whether to cut any spending or reform the tax code or entitlements.

But to what end? Congress's Joint Tax Committee estimates that raising taxes on income over $250,000 ($200,000 if you're single) will raise $823 billion over 10 years on a static revenue basis. That includes all revenue from increases in marginal income tax rates, capital gains, dividends, reinstating the phaseouts of deductions for the wealthy and also treating dividends as ordinary income.

That's only $82 billion a year in extra revenue when the federal deficit in fiscal 2012 was $1.1 trillion. So even if Mr. Obama gets his way, his tax increase would only cut the deficit by about 7.5%. And that assumes the tax increase would have no impact on economic growth. If growth slows below its already paltry pace, tax revenue would rise by less than expected despite the higher rates.

Mr. Obama may figure he can bludgeon Republicans until they give in, or blame them for any fallout if they don't. But he's taking a big gamble both with the economy and his own second term. If Washington jumps off the tax cliff in January and the economy suffers, voters will blame everyone, including the President. Mr. Obama didn't prosper politically during last year's debt-ceiling showdown any more than Republicans did.

To succeed in a second term, Mr. Obama needs faster economic growth above all else. He must have GDP growth of 3%-4% a year, instead of the 1%-2% of his first term, in order to raise incomes and provide the revenue he wants to reduce the deficit and pay for his spending. Growth at this pace is what helped
Ronald Reagan
and Bill Clinton survive other setbacks in their second terms.

The success of those two-term Presidents was also bipartisan. Reagan passed tax reform when Democrats ran the House. Mr. Clinton agreed to a balanced-budget deal with Newt Gingrich that cut the capital gains tax rate to 20% from 28%. If Mr. Obama wants to avoid a fiscal and political crash, he'll have to stop campaigning and start governing.

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